Danaher’s Low Profile Lean Excellence

The February 19th issue of BusinessWeek has a very nice article on Danaher. Regular readers know that we often cite that company as an example of real lean manufacturing and lean enterprise excellence. In fact, a quick search shows we’ve mentioned Danaher about thirty times.

In an age where many U.S. industrial companies believe they have to follow the outsourcing lemmings overseas in order to keep costs down, Danaher leverages lean to be very competitive from U.S.-based factories in typically lower-margin industries.

It owns such a mundane and sprawling portfolio of sleepy, underloved industrial businesses–companies that make dental surgery implements, multimeters, drill chucks, servomotors, and wrenches, just to name a few–that it seems deliberately assembled to be as unsexy as possible.

And the results show the impact of lean.

In 2006, Danaher posted revenues of nearly $10 billion and net profit margins of 16%, truly astounding for a company still in such Old Economy businesses as heavy-truck braking systems and hand tools. Its return on invested capital is 15%, way ahead of its industrial peer group, which is near 9%. Over 20 years, it has returned a remarkable 25% to shareholders annually, far better than GE (16%), Berkshire Hathaway (21%), or the Standard & Poor’s 500-stock index (12%).

Danaher is probably second only to Toyota in terms of large company performance due to a real lean. But Danaher’s growth model is significantly different than Toyota’s, thereby in some respects requiring an even more disciplined implementation of lean: they manage a portfolio of more than 600 subsidiary acquisitions. How do they do that?

Danaher is a prolific acquirer, averaging about a deal per month. These conglomerateurs have built their portfolio not by buying undervalued companies and holding them but by imposing on them the "Danaher Business System." DBS, as it’s called, is a set of management tools borrowed liberally from the famed Toyota Production System. Before a deal, Danaher executives tour plants and search for ways to improve performance. They estimate how wide an acquisition target’s profit margins could get, given the Danaher treatment. "That allowed us sometimes to bid more on an acquisition because we knew we’d get that value back," says Mark C. DeLuzio, president of Lean Horizons Consulting, who used to spearhead Danaher’s DBS team.

While many companies believe it is best to try to not change the culture of an acquired company, Danaher intentionally starts to do it even before the deal is complete.

Even before a deal is done, the DBS team, made up of managers throughout the company steeped in training, works with the acquisition target to inject a heavy dose of Danaher DNA. For employees at the newly acquired companies, it can be a jarring experience. It wouldn’t be at all unusual for a Danaher manager clutching a clipboard, a tape measure, and a stopwatch, in a search for wasted motion, to tick off how many steps a data analyst has to take to get to the copier.

But although traumatic, the results become evident.

When it bought Fluke in 1998, margins were 8%, much too thin for Danaher. As part of the team that managed the acquisition, Culp sought to boost that number to 20%. Many employees at Fluke, which had an engineer-centric culture where most good ideas got funding, said that couldn’t be done without hurting quality and innovation. But under Culp, Fluke narrowed its product focus, sped up inventory turns, and reduced floor space. Now, margins in that segment are 21.5%.

New employees and especially managers, both internal and from acquired companies, receive heavy hands-on training with lean methods.

New managers are often sent to Japan, where they soak up the attitude of kaizen, or continuous improvement. In fact, [CEO] Culp himself, fresh from Harvard Business School, started his tenure in 1990 at Danaher’s Veeder-Root Co. unit by spending a week in Japan building air conditioners in a lean manufacturing plant.

BusinessWeek gives a fairly good description of lean.

In essence, it requires every employee, from the janitor to the president, to find ways every day to improve the way work gets done. The process breaks from the traditional "batch-and-queue" manufacturing system, in which big lots of product are assembled in discrete steps. In a lean environment, a company moves a smaller flow of items through production. Wasteful steps are easier to spot. And if a mistake creeps into the process, it won’t affect a huge amount of inventory and can be fixed quickly. In a typical Danaher factory, floors are covered with strips of tape indicating where everything should be, from the biggest machine to the humblest trash can. Managers determine the most efficient place for everything, so a worker won’t have to walk an extra few yards to pick up a tool, for instance.

The impact of lean extends all the way to corporate management and how they try to learn even when successful… similar to the presumption of imperfection at Toyota.

The lean attitude permeates the culture at Danaher–only 40 people work in the Washington corporate headquarters, at a company of 40,000. "There are a lot of companies where if you win 10-9, nobody wants to talk about the nine runs [they] just gave up," Culp says. "We’ll celebrate the win, but we’ll talk about ‘How did we give up nine runs? Why didn’t we score 12?’"

Could you run a company that size with 600 subsidiaries with only 40 people? That wouldn’t even cover the cost accounting staff at a typical $10 billion company. Too bad the government agencies that surround Danaher’s headquarters aren’t learning something from them as well.

I know and have a lot of respect for two of the guys quoted in the article. Mark DeLuzio, the original architect of the Danaher Business System and currently president of Lean Horizons Consulting, is a long-time supporter of Superfactory and we’re working together on a couple projects. In fact just this month Superfactory has an article on Lean Supply Chains written by Robert Hawkey of Lean Horizons. George Koenigsaecker, who now runs a private equity firm and is a principle at Simpler Consulting, is a fellow AME board member.

Take a few minutes to read the BusinessWeek article. You’ll understand why we talk about them so often.

[UPDATE: Great minds think alike, or at least subscribe to the same magazines. Our friend Mark at the Lean Blog has a similar excellent analysis of the article.]

Jon-
Good comment. I was struggling myself with the concept of “forcing the DBS down your throat” vs “respect for people.” I can see the value of enforcing a system that works, and the desire to do it quickly to realize quick results, but at the same time what does it do to the people in the acquired facility? Your anecdotes from Fluke are disturbing; I wonder how it went elsewhere.

Would the Fluke people have enjoyed it more if they had been shut down or just muddled along?

When I was a GM, we needed help big time. Our new plant manager (NUMMI trained) came in and pushed lean – it was non-negotiable that we were going to move in that direction. But, he managed to be respectful, listening to people and making sure that problems/waste were being reduced in order to help people.

There’s a balance, I guess. Later, I’m going to post an article about Toyota and their concern about labor costs increasing in the U.S. They might be applauded by some for being focused on continuous improvement even though they’re the best, and having more foresight than the Detroit Three had. But, the UAW is calling them “greedy” for not being willing to share more with the workers (even though Georgetown pay is higher than the UAW average).

There’s always two sides.

A former manager of mine was at Fluke when they became Danaher and had nothing but positive things to say (and he learned a ton about lean). He left only because of family relocation issues.

Sorry I did not see these blogs back in Feb of 2007, about Danaher and how they treat people when taking over a company, so replying now may not mean much, but consider this about investing in Lean versus investing in your people.

This life is all about people and how we treat each other.

THE golden rule is about one thing: relationships; “Do unto others as you would have them do unto you”. Anybody remember Steven Covey ? His relationship building approach to management has enormous potential but its only half of the equation. I am amazed that no one (that I know of) has taken the 2 systems, The 7 Habits of Highly Effective People and The Toyota Production System (TPS/Lean) and married the 2 together in one super system.
I have been in companies that had 1 or the other, but no one has put them together, and to me, its so obvious that they are the ying and yang of the perfect form of Western management, that it is hard to believe no one has made this connection in the USA. The Japanese would not see the need since their culture is based on meeting the needs of the many before the needs of the few, and individuals are expected to place the needs of others before their own. Whereas our (America’s) culture is all about the individual “pulling themselves up by their own bootstraps”; “the selfmade man”; and “whats in it for me!” In the good ol’ US of A, we need both systems combined into one to make it worthwhile for everyone involved. Please let me know if anyone has made this marriage. I would like very much to know how well it is working. It would also be nice to know if anyone else thinks this marriage would be a good one or not.

Danaher is the worst company I have ever worked for. I worked for their dental appliance company, Sybron. With the elapse of time, Danaher sucks everyhting that was good and positive out of a company and replaces the original culture wit its own. There are no more happy and enthusiastic employees. Before Sybron was part of the Danaher empire, people didn’t get laid off during lean times. With Danaher heads started to roll in Q3 2008 and their have been successive waves since then.